I'd like to welcome everyone to the Linamar Q1 2019 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Linda Hasenfratz, Linamar's CEO, you may begin your conference.
Thanks very much. Good afternoon, everyone, and welcome to our first quarter conference call. Joining me this afternoon are members of my executive team, Jim Jarrell, Roger Fulton, Mark Stoddart, and some members of our corporate marketing, finance, and legal teams. Chris Merchant, our Global VP of Finance, will fill in for our CFO, Dale Schneider, on the call this quarter, as Dale is unfortunately not able to be here today. Before I begin, I will draw your attention to the disclaimer currently being broadcast. So let's start off with sales, earnings, and content as per normal. Sales for the quarter were CAD 1.97 billion, up 4.3% from last year, despite some soft markets out there, which is great to see.
Operating earnings were CAD 197.7 million, normalized for our balance sheet exchange impacts and any unusual items, down 5.6% over last year. Taxes, interest, and depreciation were clearly a big part of that, meaning normalized EBITDA was actually fairly flat to last year. A few factors were key in driving our performance this quarter. First, MacDon continues to perform despite some market pressure, with market share growth offsetting flat markets globally on key combine header products. Secondly, launches in the transportation business are running strong and doing a great job of driving top line growth for us in some challenging markets. A few factors were a challenge this quarter and hurt our results. First, light vehicle markets for the three regions we serve were down 5.1%, with weakness seen in every region globally.
We saw continued significant declines in the light vehicle market in Europe, thanks to both deteriorating demand for diesel vehicles and the WLTP situation. In addition, vehicle volumes were significantly down in China, affecting several key customers. Finally, volumes were down in North America as well, but particularly so with the Detroit Three, who, of course, are important customers of ours. Secondly, launch costs and transition impact were a key factor in the quarter as well. First of all, the transition to next generation platforms is weighing on margins, as both launching and declining platforms are currently running at suboptimal levels. Secondly, costs of launches globally are high, given the high level of programs that are currently launching. We do expect these effects to moderate over the next couple of quarters.
Also impacting the quarter were higher commodity costs in our industrial segment and higher interest and tax costs than last year, as mentioned. Normalized net earnings as a percent of sales in the quarter were 7.1%, down from last year due to these factors. On the positive side, our industrial segment continues to perform extremely well, with normalized operating earnings up 24% over last year and normalized margins at 16.7%, also up over last year's 15.8%. The transportation segment saw earnings and margins decline due to launch and transition impact, as described. We do expect another quarter or two of this impact before we start to see some relief.
In North America, content per vehicle for the quarter reached $167.37, up 1.2% from last year, thanks to launching business in a market that was down 0.2%. Q1 automotive sales in North America, as a result, were up 0.9% over last year at CAD 752.9 million. In Europe, content per vehicle for the quarter was $84.62, up 10.3% over last year, thanks to launching business in the region in a market that was down 5.3%. Growth in Europe for us has really been fantastic. It's only five years ago that content in Europe was only about $20.
Q1 automotive sales in Europe, as a result of our content increase, were up 4.5% over last year at CAD 472.4 million. In Asia Pacific, content per vehicle for the quarter was CAD 10.29, down 5.6% from last year, largely due to China production declining much more steeply than overall Asian production. When combined with market declines of 6.6%, we saw Q1 in 2019 automotive sales in Asia Pacific down 11.10% versus last year to reach CAD 120.2 million. Asia will be a significant growth area for us over the next several years, with more than 50% growth over current sales levels booked already.
Much of the growth is coming from electrified vehicle program launches, as might be expected, given the stronger focus for new energy vehicles in China. In fact, nearly 25% of our Asia group sales will be for electrified vehicles by 2023. It's great to see continued content per vehicle growth in the quarter in most regions, reflecting our increasing market share, thanks to large amounts of launching business. Market share growth is key to accelerating growth when volumes start to pick up. Other automotive sales not captured in these content calculations were CAD 69.8 million, up somewhat over last year, due mainly to increased tooling sales. Commercial and industrial sales were up 13.4% in the quarter at CAD 559.2 million, compared to CAD 493.2 million last year, thanks to a full quarter at MacDon this year.
If you recall, last year was just two of the three months, and global market share growth for combine headers that MacDon experienced despite a flat market. Investing in our future continues to be a priority for us at Linamar. CapEx in the quarter was CAD 120.4 million, or 6.1% of sales, down over the last couple of quarters as expected. We still expect 2019 to see lower CapEx than 2018 and end up at the low end of our normal 6%-8% range. 2020 will see a similar picture of spending at the low end of our normal range. Our net debt level came up a little, largely due to changes in IFRS accounting.
Ignoring such, we would have seen free cash flow up more than CAD 20 million in the quarter and debt down CAD 10 million over Q4 and CAD 156 million down over last year. Net debt to pro forma EBITDA is 1.78 and still expected to be back down to about 1x EBITDA by the end of the year. We expect to be under 1x next year based on continued strong and positive cash flows. We're going to drive that leverage down, thanks to the excellent free cash flow that we are expecting this year. We will generate between CAD 500 million and CAD 700 million of free cash flow this year, thanks to higher earnings, lower CapEx, and a focused non-cash working capital improvement program.
We've already seen an improvement in non-cash working capital as a percent of sales compared to the last quarter and expect to see continued improvements as such, particularly in the back half of the year. Turning to our market outlook, we are seeing stability or moderate growth this year in most of our markets, with a somewhat similar picture next year that reflects slightly softer markets in a few areas. Industry experts are predicting on- highway, medium, heavy truck volumes to be up this year in North America and Europe at 5.9% and 6.4% respectively, but to decline in Asia. Next year, declines are expected in both North America and Asia, but moderate growth expected now in Europe. Off-highway, medium duty, and heavy duty volumes are also continuing to show signs of improvement.
Turning to the access market, the industry is expecting mid-single-digit growth in the global aerial work platform market this year. Performance is being driven by growth in all global markets and in each product group. Next year is expected to see market contraction in the mid-single digits, primarily driving out of North America. We continue to see positive industry metrics, with significant infrastructure spending plans in every region and an ARA forecast of 4%-5% rental revenue growth for the rental business this year. Skyjack's backlog is strong. It's our goal to continue to outperform the market through market share growth this year and next. Turning to the agricultural market, the industry expectation is for a flat to declining combine market this year in North America, thanks to tariffs hurting North American farmers and therefore dampening demand.
This is particularly true for soybean and canola products, and particularly in Canada. Europe, CIS, and Australia are also expected to decline, driving the overall global market down in the mid-single digit range, despite Q1 being reasonably flat. It's our goal to outperform the market through global market share growth at MacDon as well. For the global light vehicle business, the forecast is for flat to slightly down light vehicle volumes at globally again this year to 16.8 million, 21.6 million, and 49.7 million units globally, or rather, North America, Europe, and Asia, respectively. Next year, we'll see similar flat volumes of ±1%-2%, depending on the region.
As mentioned, we expect to see pressure in the first half of the year in most regions, shifting to some year-over-year growth in the back half, according to these latest IHS estimates that you can see depicted here on the slide. This is going to result in a second consecutive year of global light vehicle volume declines, with forecasts for growth to resume in 2020 in most regions at this point. I think that it is important to reflect on past cycles of auto production and how they link to Linamar's earnings per share growth. In the first decade of this century, we saw U.S. light vehicle sales decline 3.3%, as depicted on this chart. In that same time period, Linamar grew EPS 10.9%.
In the next 10 years, when US sales grew at a compounded rate of 5.7%, Linamar grew our EPS 97%. The bottom line is Linamar has a strong track record of outperformance and long-term growth, regardless of auto cycles being up or being down. Turning to an update on growth and outlook, we continue to see good levels of new business wins and a strong book of business being quoted in our transportation business. Q1 was another good quarter for us in terms of new business for the transportation business, with quite a few notable strategic wins, driven by continued acceleration of powertrain outsourcing, which is very exciting. Our addressable market across a range of vehicle propulsion types continues to look excellent, as you can see on this chart.
Global vehicle growth is forecast to grow at a compound rate of 1.5%-2% over the next 25 years. Each type of vehicle propulsion offers excellent and growing potential for us, and our suite of products for each continues to be developed and to grow. The total addressable market for us today is more than $125 billion, as you can see, and growing to nearly $325 billion in the future. We have 204 programs in launch at Linamar today. Look for ramping volumes on launching transmission, engine, and driveline platforms to reach 40%-50% of mature levels this year. These programs will peak at more than $4.3 billion in sales.
We saw a shift of about $110 million of programs that moved from launch to production last quarter, including the $30 million in incremental sales from those programs hitting this year. We will see a total in launches this year in the $800-$900 million range. Next year, we will see growth in these programs of 60%-70%, which means incremental sales from launches of more than $1.2 billion in 2020. In addition, as noted, Skyjack is targeting growth above market this year, so expect high single-digit to low double-digit growth for Skyjack for 2019, and relatively flat performance in 2020 as they offset market contraction with market share growth. MacDon will face market pressure, as noted, for the balance of the year.
Market share will help offset market decline, but the extra month sales, which benefited Q1, will, of course, not repeat. This should all balance out to result in a flat to somewhat increased sales for the year compared to 2018. Next year, we are targeting single-digit growth, but of course, this will be market sensitive. On a positive note, corn head sales for North America have tripled since MacDon took over sales and distribution of the Oros product, which is great to see, a testament to the fantastic brand name and reputation MacDon has developed here in North America. Temper that growth with the loss of business that naturally ends each year, noting to expect such at the high end of our normal range of 5%-10% this year and next year, as well, of course, as normal productivity give backs.
To summarize expectations for the top line for this year, our strong backlog of launching business and growth in our industrial sectors will offset market softness in the transportation segment and drive mid-single-digit top-line growth for us this year. Next year, we'll see growth pick up thanks to strong launches and more stable markets. On the margin side, we expect to see fairly flat margin performance in both segments this year. This means staying at the mid- to high-end of our normal OE margin range of 14%-18% for the industrial segment and 7%-10% for the transportation segment, just as we saw in 2018. Excellent results, really, given market pressures.
Next year, we will see margin expansion in both segments as we get to the other side of the transition to next-generation platforms, and markets settle out, and MacDon resumes growth. The sales growth noted, coupled with flat margins, will result in mid-single-digit normalized operating earnings growth this year as well. An excellent expectation, driving from organic-only growth in soft markets. Next year, we expect double-digit normalized operating earnings growth, thanks to margin expansion in both segments and stronger growth. I'd like to highlight a couple of our more interesting wins this quarter. First, we won a fully machined block program for on-highway trucks for one of our U.S. facilities. Production will start in 2022 for this program. Also, on the commercial truck side, we picked up several components for an on-highway truck program in India, including a block and a head.
It's great to see the commercial vehicle market starting to yield some opportunities and also to fill in additional work for our facility in India. In fact, new business wins on the commercial vehicle side represented a sizable portion of new business wins for the quarter. On the casting side, we were awarded a major expansion program for cylinder head castings for one of our European foundries. Production will start next year. We continue to see excellent opportunities for our foundry business, with nearly CAD 70 million in new business wins for this quarter—for this division that we won this quarter alone. Finally, and possibly most excitingly, we were awarded a development program for a conformable hydrogen fuel tank for a fuel cell vehicle under development by a key light vehicle customer.
We feel this project is strategically very important, as we believe we will see a move towards more fuel cell electric vehicles in the Light Vehicle space over the next decade. The fuel tank is a very high-value, technologically sophisticated product in a fuel cell vehicle. The tank design derives from IP that we acquired last year for a unique design of tank that has significant design advantages over traditional hydrogen tank designs.... It's slimmer and offers much more flexibility in terms of vehicle design, which is of great interest to our customers. Turning to an innovation update, we continue to invest in innovation in each of our key businesses. I wanted to highlight a project in our transportation business this quarter for innovative lightweight structural components. This project involves a Cross-Car Beam, which is a structural component that's found within the instrument panel of the vehicle.
We jointly designed this product with our customer, which will be produced in ultra-lightweight magnesium. We developed a unique process to cast the part, which is much more efficient and cost-effective than alternative casting methods. We're utilizing a newly installed 4,400-ton high-pressure die cast press to do the job, the largest tonnage machine, by the way, installed in North America. We're really proud of the team for the work that they've done on this program. Structural parts cast in lightweight materials have huge potential in the market as they replace heavy and costly stamped steel assemblies. Lightweighting the body is particularly important in electric vehicles, where heavy battery packs are adding as much as 800 kilos to the vehicle weight and impacting the efficiency of vehicle performance.
Lightweight structural parts will, as a result, likely have a higher market potential in electric vehicles than traditional internal combustion vehicles, although, of course, light weighting is welcome in these vehicles as well. We also continue to make considerable progress on our broad digitization initiative that's summarized on this slide. We're rapidly transforming our shop floor to be more efficient, more proactive and reactive, safer, and more connected, and in the progress, creating more exciting career opportunities for our employees. There's a huge amount of opportunity in these technologies to dramatically improve the efficiencies of our operations, both on the shop floor and in the back office as well, which we can deploy on a global basis. In other areas of operations, our plants continue to perform well, both on mature business metrics and in terms of launch. Our launch systems are excellent, and our plant controls are world-class.
In terms of new plants, we're making great progress on our three key expansion projects that are underway at the moment. Our new state-of-the-art facility in Hungary to house a significant e-axle gearbox program is nearing completion. We'll be moving equipment into the facility in the summer to continue launch preparation. The project starts into production late next year. Secondly, the expansion of our fabrication facility, also in Hungary, to accommodate growing corn head sales and also to house the European requirements of Skyjack, is also nearing completion, as you can see here. And finally, the expansion of another facility in China is also well underway. This facility will also take on a major e-axle program, which launches next year as well. Finally, a trade update. Unfortunately, not a lot to report here. Discussions continue to ratify USMCA in all three countries here in North America.
It is as yet unclear if this will happen this year or not. Frankly, I'm less concerned about that. I'm much more concerned about the need to eliminate the tariffs, which are continuing to take their toll on our American customers. They are seeing billions of dollars shift from investment in important new technologies, transforming the auto industry to funding the US Treasury, which is a serious concern for the North American industry. On the positive side, the impact of tariffs to Linamar, although not zero, is certainly not close to material for either the China or metal tariff. Again, the concern is more about the impact to our customers and therefore the broader industry, whether in auto, ag, or access.
With that, I'm going to turn it over to our VP of Global Finance, Chris Merchant, to lead us through a more in-depth financial review. Chris?
Thank you, Linda, and good afternoon, everyone. As Linda noted, Q1 was a good quarter as sales grew 4.3% despite a tough market environment. All three regions were affected, with Asia down 6.6%, Europe down 5.3%, and North America down 0.2%. For the quarter, sales were CAD 1.97 billion, up CAD 80.6 million from CAD 1.89 billion in Q1 2018. Operating earnings for the quarter were CAD 187.7 million. This compares to CAD 214.9 million in Q1 2018, a decrease of CAD 27.2 million, or 12.7%. Normalized operating earnings for the quarter were CAD 197.7 million.
Net earnings decreased CAD 24.3 million, or 15.5% in the quarter, to CAD 132.3 million. Normalized net earnings were CAD 139.4 million for the quarter. As a result, fully diluted net earnings per share decreased by CAD 0.37 or 15.6% to CAD 2.00. Normalized fully diluted EPS decreased by CAD 0.21 to CAD 2.11. Included in earnings for the quarter was a foreign exchange loss of CAD 5.1 million, which included a CAD 6 million loss on the revaluation of operating balances and a CAD 0.9 million gain on the revaluation of financing balances. The net FX loss impacted the quarter's EPS by CAD 0.06.
From a business segment perspective, the Q1 FX loss, due to the revaluation of operating balance of CAD 6 million, was a result of CAD 4.8 million loss in industrial and CAD 1.2 million loss in transportation. Further looking at the segments, industrial sales increased by 17% or CAD 67.6 million to reach CAD 465.1 million in Q1. The sales increase for the quarter was due to additional sales as a result of the acquisition of MacDon, favorable changes in foreign exchange rates since Q1 2018, and increases in European and Asian scissors. Those were partially offset by the expected deferral of purchases by certain North American customers from Q1 to later in 2019. Normalized industrial operating earnings in Q1 increased CAD 15.2 million or 24.2% over last year.
The primary drivers of the industrial operating earnings results were the inclusion of a full quarter of MacDon's earnings in Q1, 2019, a favorable impact from exchange rates since Q1, 2018, and increase in the scissor volumes in Europe and Asia at Skyjack, which were partially offset by increased commodity prices and the impact of deferring purchasing in North America for Skyjack. Turning to transportation, sales increased by CAD 13 million over Q1 last year to reach CAD 1.51 billion. The sales increase for the first quarter was driven by higher sales on our launching programs, a favorable impact from the changes in FX rates since last year, which were partially offset by market declines in Europe, largely due to the continued WLTP and diesel engine issues, in addition to the market declines in Asia.
Q1 normalized operating earnings for transportation were lower by CAD 27 million or 18.4% over last year. In the quarter, transportation earnings were impacted by the European and Asian sales declines on higher margin mature volumes, the impact of the transition to next generation powertrain platforms, weighing on margins as both launching and declining mature platforms are running at less efficiency at the current volume levels. Additional costs related to heavy launch activity globally and the restructuring costs incurred in the quarter. These were partially offset by additional earnings from new launching programs and a favorable impact on the changes in FX rates since last year.
Returning to the overall Linamar results, the company's gross margin was CAD 303.9 million and decreased CAD 12.2 million due to the products mix issues related to the transition from lower mature program sales to higher launching sales. Additional costs related to the heavy launch activity globally and increased commodity costs in the industrial segment, which were partially offset by a full quarter of MacDon's earnings, increased earnings from launching programs in both segments, and the favorable exchange rates. Cost of goods sold amortization for the first quarter was CAD 94.8 million. Cost of goods sold amortization as a percentage of sales was relatively flat at 4.8% of sales. Selling general and administration costs incurred in the quarter were CAD 110.2 million, up from last year at CAD 106.6 million.
This increase is mainly due to the additional SG&A expenses as a result of having a full quarter of MacDon results in 2019. Finance expenses increased CAD 2.9 million since last year due to higher interest rates from the Bank of Canada rate hikes following Q1, 2018. The inclusion of three months of interest expense related to the MacDon acquisition debt, which were partially offset by the reduced interest expense as a result of debt repayments and higher interest earned on the investment of excess cash and on long-term receivable balances. The consolidated effective interest rate for Q1 increased to 2.9%, primarily due to the Bank of Canada rate hikes. The effective tax rate for the first quarter increased to 23.4% compared to last year, which was mainly driven by an increase in nondeductible expenses for income tax purposes.
We are expecting the effective tax rate for 2019 to be in the range of 22%-24%. Linamar's cash position was CAD 486 million on March 31st, an increase of CAD 30 million compared to March 2018. The first quarter generated CAD 130 million in cash from operating activities, which was used to fund CapEx and interest payments. Please note that the new IFRS 16 standard was adopted as of January 1, 2019. The effect of this standard was to take all off-balance sheet leases, commonly known as operating leases, and put them on the balance sheet. The impact is primarily to the balance sheet, where approximately CAD 80 million of leases are now recorded as an increase in fixed assets and an increase in debt.
To compare to 2018 debt to 2019, you will need to adjust your 2019 to remove this impact to get a proper comparison, as IFRS 16 lease debt did not exist in 2018. Net debt to pro forma EBITDA decreased to 1.78x since the acquisition of MacDon, despite the addition of approximately CAD 80 million of new debt as a result of adopting IFRS 16 lease standard. We still expect net debt to pro forma EBITDA to be back to 1x by the end of 2019. The amount of available credit on our credit facilities was CAD 692 million at the end of the quarter. To recap, Linamar had a good quarter despite the significant market declines in Europe and Asia. Linamar was able to grow sales, maintain EBITDA, and to reduce debt, excluding the impact of IFRS 16.
That concludes my commentary. I would now like to open up the call for questions.
At this time, if you'd like to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Kevin Chiang with CIBC. Go ahead, your line is open.
Hi, thanks for taking my questions here. Maybe just first for me, as it relates to MacDon, it's facing a number of, you know, I guess, headwinds related to the trade issues. I'm wondering if that's changed your long-term strategy or maybe your near-term strategy in terms of, you know, the growth levers you'll pull there, whether it's product expansion or geographic expansion. Has that changed over the past year as you try to maybe mitigate some of these trade risks?
I mean, our strategy for MacDon has not changed. We are looking to grow the business globally. We've saw success with that already. In fact, just in this quarter, as noted, MacDon was able to grow global market share for their combine headers, and that growth is coming from markets outside of North America. So great to see success in that regard. We continue to believe there's massive opportunity to focus on that global growth. The global combine header market is, you know, 75% or more of it is actually outside of North America. So MacDon, who is primarily, up till now, focused on North America, could literally quadruple their business by getting the same kind of market share globally as they have here. Now, I mean, that's not gonna happen overnight.
There's a lot of work to do to get that put in place, but absolutely, that continues to be the long-term strategy, as does looking for additional products that, the team, could be selling to their distribution network. And I think the corn head is a super example of that. I mean, they've, they took that product, it's a solid, good product. We have, you know, brand named it, MacDon, put it into the distribution network, and sales have tripled. So I think that's very positive. When it comes to, you know, these trade issues, to me, it's short-term noise, and we need to look past it and not make important strategic decisions based on that. We can make short-term tactical decisions, but, long term, you know, we obviously need to focus on fundamentals.
So we continue to believe very strongly in the MacDon story. The fact that they're gonna be flat this year when markets are down is in itself a good indicator of the great business and product that they have that we'll be able to offset market softness with some market share growth.
That's helpful. Thank you. Then, you know, you provided good color on, I guess, the book of business in Asia, with a significant percentage of that growth related to new energy vehicles. I'm wondering, you know, as you grow into that book, how should I think about the content per vehicle in Asia? Does the growth trajectory... is it a different growth trajectory than what you would have seen in Europe and North America in the past because a higher percentage of the sales will be associated with an electric propulsion vehicle?
Well, no, not at all. I mean, you know, we've got this business that's gonna grow our sales in China by, you know, more than 50% over the next three-four years. And, you know, as noted, 25% of that is electric. So, you know, we're seeing lots of exciting opportunities in that marketplace for both hybrid and battery electric vehicles across a wide range of products. It's very opportunistic. There's huge content potential for us in electric vehicles to the tune of somewhere around $2,000 at a minimum. So we think lots of exciting opportunity. I mean, we're $10 today. That gives us a lot of room to grow.
That's great color. And just last one for me, more of a clarification question. These deferred purchases in Skyjack that are being pushed off from Q1, is this primarily made up in Q2, or is it something that we should just expect as a tailwind kind of through the balance of the year?
A lot of it will be made up in Q2.
Q2. Okay. Thank you very much.
No problem.
Your next question comes from the line of Mark Neville with Scotiabank. Go ahead, your line is open.
Hi, good afternoon. Just want to clarify, some of the numbers, Linda, on the guidance. There's a lot of numbers given to us. I guess now, on a consolidated basis, the expectation is mid-single digit growth in operating earnings, versus high last quarter. Is that right?
Yes. So we're looking at mid-single digit sales growth, and now mid-single digit operating earnings growth. Yeah.
Okay. And I had a quick-
I put it back up on the screen as well for you.
Okay.
Sorry.
In industrial, I think it's now flat margin for the year. You had a really good Q1. I'm just curious. I guess the incremental pressure, I don't know if this pressure is the word, but is it predominantly MacDon?
Yeah. So I mean, the first quarter was pretty strong for MacDon, because the market was fairly flat. It was, you know, up like 1 or 1.5%, but they grew market share, so they had some nice growth in the quarter. The ag market is expected currently to decline in the balance of the year for, you know, and more negative performance going forward. So MacDon will obviously look to offset that as best they can for market share, but, you know, we do expect to see that read through to to MacDon. So, you know, as noted, if the market's flat and Q1 was up, okay, obviously, the rest of the year is gonna be negative for MacDon.
Now, offsetting that is gonna be Skyjack, which will have a stronger Q2 and Q3, right? So they had a flat first quarter because of the deliveries being pushed out, but the market is increasing in single digits, and Skyjack is gonna outperform the market at high single digit or low double digit. That means growth in the next couple of quarters for Skyjack, which should more than offset the MacDon decline. So, you know, I think a good way to think about the industrial segment is kind of tempered growth over the balance of the year.
Okay. And this on transportation, I think, again, the guidance calls for flat margin. It was down quite a bit in Q1. You've got some of the pressures you faced in Q1 from launch costs in the mix. Sounds like it continues for another quarter or two. So I'm just sort of curious what the levers are to pull to sort of make up the ground in the rest of the year on the margin.
Yeah. So we do expect to make up ground over the balance of the year, more so in the back half of the year than in the front half, just because of continued market pressures and because we're continuing to work through this transition from old generation to new generation platforms, and both of them running at the moment at sort of suboptimal levels. So we do expect to see things starting to improve, you know, a little bit in Q2, more so Q3, and more so in Q4. So, you know, the difference in margins this year versus last year is obviously negative now, but then improving-
Mm-hmm.
over the next couple of quarters and actually up over prior year at the back half in order to get that flat performance as well.
Okay. Okay, and it wasn't clear to me, was there any earnings impact, EPS, in the quarter from the transition to IFRS 16?
We had the debt impact, right? So, you know, we ended up with an extra about CAD 80 million on the balance sheet, shifting into debt, but there was no P&L impact.
Okay. Okay, thank you, and I appreciate the free cash guidance as well. So thank you.
No problem.
Your next question comes from the line of Peter Sklar with BMO Capital Markets. Go ahead. Your line is open.
There was a, I believe, a CAD four million restructuring charge during the quarter. Can you tell us what that related to?
Yeah. You know, it's in a couple of different areas of just, you know, reacting to some market situations and also restructuring within our light metal casting group. So we're changing the org structure a little bit and shifting more responsibility out to the plant. So there was a bit of severance associated with that this quarter and last quarter as well.
Okay. This deferral you're seeing in Skyjack, where some of your customers or customer delayed ordering from Q1 into further quarters, does some of that relate to United Rentals acquisition of BlueLine? Is that the kind of thing you're talking about?
Yeah. Yeah, yeah, it would have some impact for sure on their CapEx plans. And certainly a lot of the orders that we had just got pushed out because of that CapEx that they had and utilization.
Peter, you know, United just... I mean, they had to take some time to evaluate the assets that they got there with BlueLine. But from what we've seen, actually even March shipments were up significantly, and same with in April.
Yeah, and our backlog is strong.
Yeah.
Okay. You mentioned in the MD&A that WLTP is still having an effect. Do you think that's wound its way through, or are there still powertrains that need to be qualified?
Yes. We see, even just talking with OEMs, that it'll sort of bottom out by the end of Q2.
Okay. And then lastly, these efforts that you're making with working capital, like your working capital investment in the quarter was less than it was last year, so you're making progress in your non-cash working capital investment. But I think, and correct me if I'm wrong, I think you said last quarter, you actually wanted to create cash through working capital, so you're anticipating, divesting or unwinding working capital. So is that still the plan?
Yes, absolutely. That is still the plan. We're gonna see more of the realization of those efforts in the back half of the year than in the front half of the year as we work through some of the long-term receivables. We're, you know, looking at putting new programs in place for MacDon systems. That wouldn't happen until the end of the year, and other elements of inventory are more realistically going to be able to be reduced in Q3, Q4 than in the first half.
Okay. And then just, can you comment on the credit experience that you're having with the long-term receivables that you've extended to the, you know, to the rental yard operators?
... Yeah, we, we obviously keep a, a very close eye on where we stand on those long-term receivables. I'll just remind you as well, we put a new program in place last year as of, and it's end, sort of mid-midyear last year, that has basically put an external financing company in place to do the financing for, for those long-term customers. So our level of long-term AR for Skyjack has actually been declining since sort of midyear last year. So our exposure is gradually, you know, obviously, winding down, and the risk shifting over to, to the, that external credit provider.
If you have with what you have, have you had any negative credit experience? No.
No.
Nothing. Okay. Glad to hear that. Thanks very much.
No problem.
Your next question comes from the line of Brian Morrison with TD Securities. Go ahead, your line is open.
Thanks. Good evening. I just wanted to ask, follow up on Peter's question, actually. You had the nice slide on free cash flow, and then you just comment upon the components, one of them being long-term receivables. But can you just talk about the magnitude of the working capital benefit you anticipate during 2019?
Well, I mean, it is a significant portion of that cash flow that we're, we're looking to just flipping back to the slide, that we're looking to to create. But at the same time, don't forget that earnings are up this year, and, and sorry, here it is. Earnings are up this year, and CapEx is down, so that in itself. Last year, we generated, you know, CAD 150 million of free cash flow. So, you know, we're gonna get a chunk of that cash flow coming out of, you know, basically operations, and then another slice that'll come out of the non-cash working capital. We haven't split it up, like, what's the split each, of the 500 to 700 between the two, but it is a combination of both.
Okay. And then just going through transportation margins with the reset again, I presume I know the answer to this, but I just want to understand the cadence of margins as you go through the year. As you've commented, you expect headwinds for another quarter or two. Should I presume that we should expect the trend to be some pressure in Q2, and then it should revert back to positive with the performance you had in Q3 of last year? Is that how we should be looking at it?
You know, you're definitely gonna continue to see impacts in the second quarter. I mean, you know, I think that the comparison to prior year, the differential is definitely going to shrink. But it's not going to completely go away. You won't see that until Q3 and Q4.
Okay.
At which point, you'll actually see a more positive margin compared to last year.
So the inflection is gonna happen in Q3?
Yes.
Great. Then last question, you, Mark asked this earlier, but I, I understand IFRS 16 had no impact upon P&L. Do you know what the impact on EBITDA was?
We'll have to come back to you on that, Brian. I don't know off the top of my head, but I'll get Dale or Chris to give you a shout back with that.
Okay, that's great. Thank you for your time.
Your next question comes from the line of Warren McCann from McCann & Associates. Go ahead, your line is open.
Yes, I've got a question with regards to the normal course issuer bid. And, it—I saw as of March thirty-first, there were forty-five thousand shares that had been repurchased. Is it the intent of the company to perhaps focus on the reduction of debt before they address share repurchases over the next 10-12 months?
Yeah, I mean, we have, for sure taken a more cautious approach to the market on our NCIB. We're definitely conscious of debt level targets and really wanting to, achieve those and trying to balance those goals with goals, around the buyback, which, you know, we understand is important to shareholders, so important to us as well. What we've done is try and use sort of a disciplined system to buy when we see weakness and hold off when we see, the share price strengthening. And, you know, we will look to continue to adjust that and continue to balance, you know, what do we want to do on NCIB, and what do we want to do on, on debt reduction throughout the next, 12-18 months.
I see. So, it's just a perspective with regards to where you see the best allocation of debt repayment to where and the cash flow that you project in the next year or so, and then you'll allocate accordingly.
Exactly.
Okay, great. Thanks, Linda. I appreciate it.
No problem.
There are no further questions at this time. I now turn the call back over to the presenters.
Okay, great. Thanks very much. Well, to conclude this evening, I'd like to leave you with three key messages. First, we are very happy to see both sales and market share up in most of our businesses this quarter, despite challenging markets, echoing Linamar's consistent above-market performance throughout historical economic cycles. Second, we are expecting to see strong cash flow this year of CAD 500 million-CAD 700 million, which will further fortify our already strong balance sheet. And finally, we are excited about the new opportunities we're seeing in electrified vehicles, both battery electric and fuel cell electric, as our industry evolves towards the future. Thanks very much, everybody, and have a great evening.
This concludes today's conference call. You may now disconnect.